Closing the Deal

NOTE: In some states, the process of completing the purchase of a home is known as the “Settlement” process. Often the seller and buyer will come together at the Settlement table where documents are signed and exchanged. There may be a settlement attorney who facilitates this process. In California, the term “Escrow” is used to describe the process of completing the sale of property.

How Does the Escrow Process Work?

The escrow holds all monies, instructions and documents for the purchase of your home, including your down payment funds and your lender’s funds and documents for the new loan. The escrow officer takes instructions based on the terms of your purchase agreement and your lender’s requirements. The escrow officer can hold inspection reports and bills for work performed as required by your purchase agreement. Other elements of the escrow include hazard insurance, title insurance and the grant deed from the seller to you. Escrow cannot be completed until the instructions (requirements) have been satisfied, and all parties have signed escrow documents.

The escrow holder’s duties include:

• Serve as the neutral agent and the liaison between all parties involved.
• Prepare the escrow instructions.
• Request a Preliminary Title Search to determine the status of title to the property.
• Comply with the lender’s requirements as specified on its instructions to escrow.
• Receive and handle purchase funds from the buyer.
• Prepare or secure the deed and documents related to the escrow.Prorate taxes, interest, insurance and rents.
• Secure releases of all contingencies or other conditions imposed on the escrow.
• Record the deed and any other documents.
• Request title insurance policy.
• Close the escrow pursuant to instructions supplied by the seller, buyer and lender, if any.
• Disburse funds as authorized by the instructions, including charges for title insurance, recording fees, real estate commissions and loan payoffs.
• Prepare final statements for all parties involved that account for the disposition of all funds held in the escrow account.

How Do I Open an Escrow?

Your real estate agent will open the escrow for you. As soon as you execute your purchase agreement, your deposit is given to the title company for deposit into the escrow account. How will you know where your money has gone? Written evidence of your deposit generally is included in your copy of your purchase contract. Your funds will then be deposited in your separate escrow or trust account and processed through your local bank.

Escrow Instructions

Escrow instructions define all the conditions that must occur before the transaction can be finalized. Your escrow instructions specify, in a debit and credit format, the disposition of your purchase funds. They also provide for title protection for your home.

What Information Will I Have to Provide?

You may be asked to complete a statement of identity. Because many people have the same name, the statement of identity is used to identify the specific person in the transaction through such information as date of birth, social security number, etc. This information is kept confidential.

How Long is the Escrow?

The length of an escrow is determined by the terms of the purchase agreement and can range from a few days to several months. On average, it takes 30 to 45 days.

Let’s talk about your specific concerns or plans for the property. Concerned about the open parcel behind the house? Ask about it!

You may also wish to investigate the following non-physical conditions, including:

• Governmental zoning, requirements and limitations.
• Governmental permits, inspections or certificates.
• Limitations, restrictions and requirements affecting use of the property.
• Rent and occupancy control.
• Schools.
• Proximity and adequacy of law enforcement, crime statistics, proximity of registered sex offenders (see section on Megan’s Law) and other criminals.
• Proximity to fire, police and other services.
• Proximity to commercial, industry or agricultural activities.
• Existing and proposed transportation, construction and development, which may affect noise, view or traffic, airport noise, or odor.
• Wild and domestic animals, other nuisances, hazards or circumstances.

For Further Protection – Home Warranties: Home warranties have become a more popular option on homes for sale. For protection you may wish to have a home warranty that either you or the seller pays for. (It’s negotiable.) Warranties range in price from $300 – $600 and, for a fixed rate, generally cover limited aspects including plumbing, electrical, pest control and a host of other related areas. If you have a problem, generally you’ll pay $35-$50 to have a professional come out inspect and fix problems that are covered. Warranty agents typically are on hand 24 hours a day, 7 days a week to take your calls in emergencies.    

The key to the loan process going smoothly is the initial application interview. At this time the loan officer obtains all pertinent information and documentation so unnecessary problems and delays may be avoided. This is the best time to discuss loan programs best suited to meet the home buyer’s needs.

Step 2. Automated Underwriting

After the application is completed, the loan officer inputs the application into the automatic underwriting system. This is an automated financial evaluation program that analyzes the data from the loan application of the borrower, such as income, credit history, debts, property details, debt-to-income rations, etc. This process evaluates the borrower’s financial picture and makes a credit decision. In conjunction with this review, the loan officer requests a credit report run on the borrower(s).

Step 3. Requesting Documentation

The next step after receiving the initial lending decision is that the loan officer will request certain documents such as bank statements, W2’s (2 years), verification of funds, landlord details and any other supporting documentation that has been requested.

Step 4. The Home buyer Enters into Contract on a Property

Step 5. Loan Submission

Once all of the necessary documentation has been acquired, the loan officer puts the loan package together and submits it to the underwriter for final approval. The final loan package includes the contract on the property, the property appraisal, preliminary title reports and any conditions that were identified in the automated underwriting process. The loan officer submits the final loan package to the underwriter for formal loan approval.

Step 6. Loan Approval

The underwriter reviews the contract, property appraisal and preliminary title reports and validates the conditions from the automated underwriting process. File disposition is achieved. Assuming all criteria are met, the loan is approved and/or other conditions may be requested as terms of funding.

Step 7. Rate Lock

The loan officer will discuss the loan programs available to the home buyer(s) in conjunction with discussing the final loan approval and conditions. Based on the outcome of the property purchase and final loan approval process, the buyer may wish to or need to review other loan programs. A final loan program decision is reached and the request for rate lock is made.

Step 8. Documents Are Drawn

After the loan approval, the loan documents (including the note and deed of trust) are completed and sent to the title company. The escrow officer calls the borrowers to come in when the papers are ready for final signature. At this time, the borrowers are told how much money they will need to bring in to close the loan.

Step 9. Funding

Once all the parties have signed the loan documents, they are returned to the lender, who reviews the package. If all of the forms have been properly executed, the funds are then transferred. At closing, the borrower must present a cashier’s check or arrange for a wire transfer of funds directly to the title company for the required closing costs and payments. No personal checks are accepted. Also, funding conditions must be submitted and satisfactorily met at this time.

Step 10. Recordation

When the title company receives the funding check from the lender, the title company makes the lender’s security for the loan a matter of public record. This is done by recording both the note and deed of trust at the County Recorder’s office. Escrow is now officially closed.

Credit Report Fee

This one-time fee covers the cost of your credit report, which is processed by an independent credit-reporting agency.

Document Preparation Fee

There may be a separate, one-time fee that covers preparation of the final loan papers, including the note and the deed of trust.

Loan Origination Fee

Often referred to as “points,” one point is equal to one percent of the mortgage loan. As a rule, if you are willing to pay more in points, you will get a lower interest rate. Anything in addition to one point is referred to as “discount points.”

Miscellaneous Title Charges

The Title Company will charge fees for a policy of title insurance and escrow services, which may include charges for document preparation, notary fees, recording fees and a settlement of closing fee. These are all one-time charges. Local custom by county will dictate whether buyer or seller pays all or a portion of these fees.

Private Mortgage Insurance (PMI) Premium

Depending on the amount of your down payment (generally less than 20%), you may be required to pay a fee for private mortgage insurance, which protects the lender against loss due to foreclosure. You may also be required to place funds into a special reserve account (called an impound account) for PMI, which will be held by the lender.

Prepaid Interest

Depending on the day of the month your loan closes, this charge may vary from a full month of interest to just a few days of interest. If your loan closes near the end of the month, you will have to pay only a few days of interest.

Taxes and Hazard Insurance

Based on the month you close, property taxes will be prorated between you and the seller. You may also be required to pay a full year’s hazard insurance (or homeowner’s insurance) premium in advance. In addition, you may also be required to place funds into a special reserve account (impound account) for taxes and insurance, which is held by the lender. You absolutely must have this to obtain a mortgage.

The “dwelling coverage” portion of your hazard insurance covers costs to completely rebuild your home, while the “liability coverage” protects you against accidents that occur on your property. “Personal Property Coverage” pays to replace your possessions and generally totals 50 to 75 percent of the dwelling coverage amount. Flood and earthquake insurance policies also are available and are recommended if you are in high-risk areas.

Title Insurance Fees

There are two title polices – a buyer’s policy, which protects the new homeowner, and a lender’s title policy that protects the lender against loss due to a defect in the title. These are both one-time fees.

This is a detailed summary of costs you may have to pay when you buy or refinance your home. They are listed in the order in which they should appear on a Good Faith Estimate you obtain from your mortgage lender. Elements of the Good Faith Estimate are: (Costs will apply differently to each home buyer and are not particular in total to all home buyers)

Document Preparation Fee  Underwriting Fee  Administration Fee  Appraisal Review Fee  Warehousing Fee

Prepaid Interest  Homeowner’s Insurance  VA Funding Fee  Up Front Mortgage Insurance Premium (UFMIP)

Interest  Reconveyance Fee  Demand Fee  Sub-Escrow Fee  Loan Tie-In Fee

Loan Discount Fee

On a government loan, the loan origination fee is normally listed as one point or one percent of the loan. Any points in addition to the loan origination fee are called “discount points”. On a conventional loan, discount points are usually lumped in with the loan origination fee.

Appraisal Fee

Since the property serves as collateral for the mortgage, lenders want to be reasonably certain of the value and they require an appraisal. The appraisal is used to determine if the price you are paying for the home is justified by recent sales of comparable properties. The appraisal fee varies, depending on the value of the home and the difficulty involved in justifying value. Unique and more expensive homes usually have a higher appraisal fee. Appraisal fees on VA loans are higher than on conventional loans.

Credit Report Fee

As part of the underwriting review, the mortgage lender will want to review the borrower’s credit history. The cost varies depending upon the type of report requested. 

Lender’s Inspection Fee

This is generally associated with new construction and is associated with what is called a 442 inspection. Since the property is not finished when the initial appraisal is completed, the 442 inspection verifies that construction is complete with carpeting and flooring installed.

Mortgage Broker Fee

About seventy percent of loans are originated through mortgage brokers and sometimes the points associated with the loan are listed here instead of under Loan Origination Fee. They may also add in any broker processing fees in this area. The purpose is to clearly indicate how much is being charged by the wholesale lender and how much is charged by the broker. Wholesale lenders offer lower costs/rates to mortgage brokers than you can obtain directly, so you are not paying “extra” by going through a mortgage broker.

Tax Service Fee

During the life of the loan the borrower makes monthly property tax payments, either on one’s own or through an impound account with the lender. Since property tax liens can sometimes take precedence over a first mortgage, it is in the lender’s interest to pay an independent service to monitor property tax payments.

Flood Certification Fee

The lender must determine whether or not the property is located in a federally designated flood zone. This fee is usually charged by an independent service to make that determination.

Flood Monitoring

From time to time flood zones are re-mapped. Some lenders charge this fee to maintain monitoring on whether this re-mapping affects the property.

NON-RECURRING CLOSING COSTS NOT ASSOCIATED WITH THE LENDER

Closing/Escrow Fee

The fees associated with the closing.

Title Insurance

Title Insurance assures the homeowner that they have clear title to the property. The lender also requires it to insure that their new mortgage loan will be in first position.

Notary Fees

Most loan documents have multiple sets that must be notarized.

Recording Fees

Certain documents are recorded with the local County Recorder’s Office.

Pest Inspection

This is also referred to as Termite Inspection. This inspection tests for pest infestations and other items such as wood rot and water damage. If repairs are required, the amount to cover those repairs is usually covered by the seller, but it is a negotiable item. Usually the pest inspection fee is paid by the seller and is not normally reflected on the Good Faith Estimate.

Home Inspection

Since it is the home buyer’s choice to obtain a home inspection, this cost may not be reflected on the Good Faith Estimate. However, it is highly recommended.

Home Warranty

This is an optional item. A Home Warranty usually covers such items as the major appliances, should they break down within a specific time. Often this is paid by the seller.

Homeowner’s Association Transfer Fee

When buying a condominium or a home with a Homeowner’s Association, the association often charges a fee to transfer all of their ownership documents to the buyer.

REFINANCING ASSOCIATED COSTS

Interest

When closing the transaction on a refinance, there may be outstanding interest due on the old loan.

Reconveyance Fee

This fee is charged by the existing lender when they “reconvey” their collateral interest in the property back to the borrower through recording of a Reconveyance.

Demand Fee

The existing lender may charge a fee for calculating payoff figures.

Sub-Escrow Fee

This fee is actually charged by the Title Company.

Loan Tie-In Fee

This fee is charged by the Escrow Company.

Your escrow officer or myself will contact you to make an appointment for you to sign your escrow instructions and final loan papers. At this time, the escrow officer will also tell you the amount of money you will need (in addition to your loan funds). Your loan funds will be sent directly to the escrow by the lender. You may sign your escrow instructions and loan documents at a title company office, your real estate agent’s office or some other location agreed upon by all parties.

What should I look out for during the final walk-through?

Prior to your closing-day escrow appointment, if provided within the Purchase Agreement, you should have a chance to perform a walk-through with your agent. This will likely be the first opportunity to examine the house without furniture, giving you a clear view of everything. Check the walls and ceilings carefully, as well as the results of any work the seller has agreed to do in response to the inspection’s findings. Any problems discovered previously that you find uncorrected which the seller agreed to correct, should be brought up before closing.

Good Funds

In order for escrow to close, you must provide what is known as “Good Funds.” This means that escrow can close:

•  On the same day as your deposit if the final down payment and closing funds are deposited by cash or electronic transfer (“wired funds”).

•  On the next business day after the business day of the deposit, if the funds were deposited by cashier’s check, teller’s check or certified check.

•  If the payment is made by personal or business check, when the deposit is made available for withdrawal by depositors. Depositing banks may hold these types of funds for up to three business days for most “local” items and up to seven business days for “non-local” items.

The Escrow Appointment

Once your loan is approved, you will be asked to go to the Title Company to sign the loan documents and escrow instructions that specify disposition of your loan funds. You will sign these documents in the presence of a notary public.

When you’ve signed everything, your lender will make one final review of the documents and conditions for closing. Once completed, the lender will send the loan funds to escrow. Often, lenders require three business days before the loan is funded. Below is a list of items you will need in preparation for the appointment to sign escrow papers:

•  Identification — One of the following forms of identification must be presented at the signing of escrow in order for the signature to be notarized: a current driver’s license, passport, State of California Department of Motor Vehicles ID card.

•  Cashier’s Check — You need a cashier’s check or a certified check issued by a California (or your state) or your financial institution made payable to the title company. If using a personal check, the title company may delay the closing until the check has cleared.

•  Fire and Hazard Insurance — You must have fire and hazard insurance in place before the lender will send the money to fund the loan. Whenever you buy a home, you must have insurance. Provide your escrow officer with the insurance agent’s name and contact information so they can make sure that the policy complies with your lender’s requirements.

What’s the next step after I’ve completed my sign-off?

After you have signed all the necessary instructions and documents, the escrow officer will return them to the lender for a final review. Upon completion, the lender advises your escrow officer that the loan is ready to be funded. What is an “escrow closing?” Once all the conditions of the escrow have been satisfied, the escrow officer advises you of the date the escrow will close and takes cares of the technical and financial details. The culmination of the transaction, an escrow closing signifies legal transfer of title from the seller to you. Usually the Grant Deed and Deed of Trust are recorded within one working day of the escrow officer’s receipt of loan funds. This completes the transaction and signifies the “close of escrow.”

What do I get at closing?

Escrow will record the deed of trust, disperse the funds, provide both parties with a final financial accounting in the form of a settlement statement, and close the escrow.

Settlement Statement

•  HUD-1 Form (itemized services provided and the fees charged; it is filled out by the closing agent and must be given to you at or before closing) •  Truth-in-Lending Statement •  Mortgage Note •  Mortgage or Deed of Trust •  Keys to your new home

What can I expect to happen on closing day?

You’ll be asked to present your paid homeowner’s insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable).

The seller will provide proofs of any inspection, warranties, etc. Once you’re sure you understand all the documentation, you’ll sign the mortgage note, promising to repay the loan. The seller will give you the title to the house in the form of a signed deed.

You’ll pay the lender’s agent all closing costs and, in turn, the lender will provide you with a settlement statement of all the items for which you have paid. The deed and mortgage will then be recorded in the County Recorder’s office. At that point, you officially will be a homeowner.

Disbursement of Funds Held in Escrow

In some cases, the escrow agent will be instructed to hold funds in escrow to pay off obligations, which may not be completed until after the close. For example, funds may be set aside to correct a structural problem, remodeling or termite repair work. Upon completion of the project, the escrow agent, having received proper documentation and releases will disperse the reserved funds.

When will I receive the deed?

The original deed to your home will be mailed directly to you at your new home by the County Recorder’s office. This usually takes several weeks and may take longer depending on regional activity.

After the close…

If the funds from the new loan are being used to pay off an existing loan (generally, if you are selling one property and buying another), the old lender is required by law to issue a full re-conveyance (release) of its loan. As soon as the deed of re-conveyance removing the previous deed of trust is received, it must be recorded and the original will be returned to you. This may take several weeks. However, this delay is normal, and is nothing to be concerned about.

Your lender may retain this loan in its own portfolio or may sell the loan to either a private or public agency, such as the Federal National Mortgage Association (Fannie Mae). In either case, you will receive specific instructions as to how to make your loan payments.